Defined contribution plans are decisively reducing their reliance on record keepers' target-date funds, moving to other providers to obtain a more flexible investing approach.
They are responding to changing investment strategies based on, among other things, the rapid growth of target-date funds and their prominence as a qualified default investment alternative, say DC consultants and researchers. Sponsors also are taking advantage of a greater choice of target-date fund styles and different glidepaths.
“As plans increase their target-date assets, it makes less sense to devote all assets to a single asset manager,” said Jessica Sclafani, associate director, retirement, at Cerulli Associates Inc., Boston.
In the past few years, “there has been a momentous change” in sponsors' approach to target-date funds, said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan Associates Inc.
“Sponsors are rethinking whether they have the right fund for the plan,” Ms. Lucas said. This rethinking reflects a change in workplace demographics, increased assets flowing into a plan's target-date fund, a review of different glidepaths and an assessment of performance. Sponsors may decide that a target-date series first offered years ago might be less appropriate in the future, she said.
In annual surveys, Callan has found a sharp decline in the percentage of plans using target-date or target-risk funds offered by their record keepers. Last year, it was 32.4% for these record keepers' products that use mutual funds or collective trusts as underlying investments— down from 69.8% in 2011. When asked about this year's approach, 25.2% said they would use a record keeper's target date/target-risk fund, said the study, published in January.
Meanwhile, use of target-date/target-risk funds unaffiliated with record keepers climbed to 45% last year from 16.9% in 2011, according to Callan's research. When asked about this year, 49.5% said they would offer a target-date/target-risk series unaffiliated with their record keeper.
Custom target-date funds accounted for 17.1% of survey responses last year vs. 11.3% in 2011 in the Callan surveys. When asked about this year, 16.2% of DC executives said they would pursue a custom target-date portfolio. Most of the survey respondents aren't Callan clients.